Consumers seeking new home mortgages could face higher costs for private mortgage insurance and tougher standards for loans that require small down payments in reaction to potential losses on mortgages for properties sold by Equity Programs Investment Corp. (EPIC).
The private mortgage insurance industry, which had been squeezed recently by a rising national foreclosure rate, now faces potential losses of $300 million to $400 million stemming from its relationship to EPIC, a real estate investment company that two weeks ago stopped making payments on $1.4 million of mortgages and mortgage-backed securities.
The private mortgage insurance (PMI) industry, led by Ticor Mortgage Insurance Corp., insured hundreds of loans on investment properties sold by EPIC to limited partnerships. Ticor, the fourth-largest PMI company in the country, faces potential losses of $165 million.
Private mortgage insurance, which protects the lender in case of a default, has made home ownership possible for millions of home buyers who cannot afford to make a big down payment on the house of their dreams.
Ticor announced two days ago that it will stop accepting new policy applications after Tuesday in an effort to reduce possible future exposure for the company. All PMI companies renew their policies at the end of the year, and it is unclear at this point whether Ticor's capital reserves will be large enough to allow it to renew its existing policies.
"Now that Ticor has ceased writing new business, it means that the insurance capacity will be further restricted," said William Hemphill, president of United Guarantee Corp., another PMI company. "We were close to the limit before this and it will be even tighter now."
Roughly three out of every 10 mortgages written in the last year carried PMI insurance, and among first-time buyers -- who usually have less cash for down payments -- the number of mortgages with private insurance was far higher.
But some industry representatives say a contraction of the market for new PMI policies, created by the EPIC crisis, could mean that PMI companies might refuse to insure loans with down payments of 5 percent of the price of the house or less.
State regulators require that PMI companies keep certain levels of capital reserves to pay off claims on policies in force, and do not allow companies to write more claims than they can cover.
Inspired by the government's Federal Home Administration insurance, but working much differently, PMI guarantees the mortgage owner will be paid if the home owner defaults. It does not protect the homeowner -- other kinds of insurance do that -- but rather the lender.
When the buyer makes a down payment that is less than 20 percent of the purchase price of a home, the mortgage lender most likely will require PMI to cover the additional risk. If the home buyer later defaults on the loan and the lender is unable to sell the house at a price that will cover the outstanding mortgage balance, the PMI company pays the difference.
Private mortgage insurance also is required on loans that lenders may believe are riskier than usual, such as those for resort homes, condominiums in saturated markets and investment properties.
Some industry officials have said the problems with Ticor will affect only insurance on mortgages for investment properties, such as those involved in the EPIC crisis. Such mortgages make up only 5 percent of the loans with PMI. Mortgages on owner-occupied houses make up 95 percent of the loans with private mortgage insurance.
But industry analysts on Wall Street say that any constriction of the PMI industry, as it is being hit with a wave of claims stemming from loans underinsured during the early 1980s, will make PMI more difficult to get and more expensive.
"There are certain types of mortgage instruments that some lenders might have trouble getting PMI for in the future, and there might possibly be some changes in underwriting standards," said Michael Moleski, an analyst for Moody's Investors Service. "The other PMI companies will be able to pick and choose which of Ticor's business they want, and they will not necessarily want to take all of it."
Hemphill said that premium rates could be expected to rise sometime over the next few months.
"The industry will have to increase its capital reserves to be able to write more policies, and capital costs money," Hemphill said. "Either they will have to get infusions of capital from their parent companies or they will have to borrow it, and that's expensive."
Premium rates already have risen substantially over the past year for loans with small down payments, Moleski said. For a family putting 10 percent down on the purchase of a $100,000 house, PMI today would cost $900 at closing and between $315 and $405 a year until the homeowner's equity in the house rose to an amount equaling 20 percent of the mortgage.
A year ago, PMI for the same amount would have cost about $700 at closing, and $225 a year thereafter.
The Federal National Mortgage Association, which buys 10 percent of the home mortgages generated in the country and then sells mortgage-backed securities based on pools of the loans, said this week that after Tuesday, it no longer will make commitments to buy loans with Ticor PMI.
A spokesman for the Federal Home Loan Mortgage Corp., the other major conduit company for the secondary mortgage market, said yesterday it is too early to "speculate" on the impact EPIC will have on the mortgage finance industry, but that the issue is under study.